Canada's economic output shrank in December

Canada's gross domestic product shrank by 0.2 per cent in December as inventory investment slowed sharply and imports were down.

Despite news, loonie edges higher

A worker grinds a piece of metal in a factory in Quebec City. (Jacques Boissinot/Canadian Press)

Canada's gross domestic product shrank by 0.2 per cent in December from the month earlier, as inventory investment slowed sharply, imports declined and exports rose slightly.

In the last three months of 2012, Canada's economy still eked out a small gain of 0.2 per cent, about the same pace as the country saw in the previous quarter, Statistics Canada reported Friday. On an annualized basis, the economy expanded by 0.6 per cent during the period.

Those figures are about half what the Bank of Canada had predicted in January, and about one-quarter what it had said was likely as recently as October.

Many analysts now believe 2013 will be even weaker, between 1-1.5 per cent, and that is if there is no major shock.

Added to the data for the rest of the year, the latest report shows Canada's economy grew by 1.8 per cent for 2012 as a whole. That's slower than the 2.6 per cent pace seen in 2011.

"Momentum in the Canadian economy has thoroughly waned from the growth figures that were once being posted in 2010 and 2011," Scotiabank's economics team said in a research report following the release of the data.

Since the third quarter of 2011, the economy has posted consecutive quarterly growth rates of 2.2, 1.7, 1.7, 0.6 and now 0.2 per cent, the bank noted.

The main source of strength in the economy was mining and oil and gas extraction, the data agency said.

Finance Minister Jim Flaherty responded to the news on Friday, telling reporters that while he's confident Canada remains on the right track, risks remain.

"Our results reflect our solid fundamentals but they also reflect the uncertainty that we see abroad and the weakness of the global recovery," Flaherty said.

The loonie largely shrugged off the news, declining a bit when the data was released but slowly making gains through the day to trade at 97.30 in the afternoon, up more than a third of a cent.

With files from The Canadian Press